The impact of taxation touches all of us in many different ways. From the compliance of lodging personal or business taxation documents to the possibility of confronting a large tax debt with payment terms that need to be resolved, to sensible estate planning strategies including testamentary trusts and the use of superannuation. Whatever the issue might be, getting advice early is important to ensure you reach the best possible outcome in your circumstances.
We understand that there may be a time when you’re unable to lodge or pay tax by the due date. If you’re having difficulty with your ATO lodgements, we can help. Contact us as soon as possible before the due date and we will work with you to find a solution.
It is important to remember that it is your responsibility to meet your obligations, even if you use a tax agent. You can have an authorised representative or your tax agent contact the ATO to discuss your situation.
A penalty may apply if you fail to lodge on time, so even if you can’t pay, lodge on time to avoid this extra cost.
Usually, if you can’t pay by the due date, you can enter into a payment plan. A general interest charge (GIC) will apply to any amount not paid by the due date.
ATO Payment Plans
If you owe the ATO a sum that you’re unable to fully meet, then you should enter into a payment arrangement.
This is essentially a payment plan between you and the ATO where you agree to pay off your tax debt over time by way of instalments. Naturally interest is payable on the outstanding debt.
It’s fundamentally important to note though that you must keep not only make every payment on time for the length of the payment plan, but all other ongoing tax liabilities including lodgements must be maintained. That is, you must submit all your future lodgements on time, and you must pay any new tax debts by the due date.
Even though these new debts do not form part of the payment arrangement – if you don’t pay them, you will default the payment plan.
Note the consequences if your payment arrangement defaults. If this happens the ATO can use one of its many debt collection powers against you. This can include issuing a garnishee notice to your bank, or serving you with papers to try to wind up your company or make you bankrupt.
So if you think you might be about to trigger a default you should contact the ATO as you may be able to renegotiate the arrangement so that it doesn’t default. It’s much better to do this than wait until a default occurs.
The effect of a trust is the separation of the beneficial, from the legal ownership of property. Holding assets in trust can protect them from claims by third party creditors in the event of bankruptcy, insolvency, court or family law proceedings.
A testamentary trust is a discretionary trust contained in a Will that comes into effect when the testator dies. A trustee is pre-appointed to manage the trust and may choose how and when the deceased’s assets are distributed to beneficiaries. The flexibility and control in distributing assets has potential benefits including the protection of vulnerable ‘at-risk’ beneficiaries such as minors, those with intellectual disabilities or drug and alcohol addictions.
Even modest estates may benefit from having a testamentary trust, particularly where the testator is part of a blended family.
Trusts are complex and sound advice is important to ensure the trust is compliant, structured to achieve the required objectives, and that any stamp duty and taxation implications are considered.
Making the most of your superannuation
Death benefits of a superannuation account are paid to an eligible ‘dependant’ determined by the fund trustee, or in accordance with a Binding Death Benefit Nomination (BDBN).
Consideration of the way death benefits are taxed in the hands of the recipient, is important to ensure the most tax-effective results are achieved.
Essentially, a spouse or partner will be considered a tax-dependant under taxation law and accordingly, will receive death benefits tax free. Alternatively, whilst adult children are considered dependants under superannuation legislation, they are not ‘tax-dependants’ and will need to pay tax on any death benefits.
A BDBN will ensure that your superannuation benefits are paid to the intended beneficiaries and receive the most advantageous tax treatment.
Superannuation Trust Deeds
A self-managed superannuation fund (SMSF) provides members with more flexibility and autonomy over investment choices and fund management than traditional funds.
Funds must be compliant and follow strict regulations to ensure members can access the various income and capital gains tax concessions which have been implemented to encourage people to save for their future.
The fund is not a separate legal entity, so its activities are carried out by a trustee (individual fund member or corporation).
The fund must be carefully structured, and its activities governed by a superannuation trust deed which is integral to its compliance and operations. The deed should be drafted to ensure that it:
- Is compliant with superannuation and other laws and allows for variations and updates;
- Provides flexibility regarding investment choices including permitting the fund to borrow to invest in property;
- Sets out clear processes for completing binding death benefit nominations.
Varying your superannuation trust deed
Occasionally, it may seem desirable to ‘replace’ an old trust deed with a new version to take advantage of changes in superannuation laws or new investment strategies. This is not recommended, as replacing an existing deed with a new version could constitute the creation of a new fund which could potentially attract capital gains tax and stamp duty.
In these circumstances, a deed of variation enables a comprehensive update of the old deed without triggering a tax or duty liability.
Strict processes must be followed, and it is recommended that a legal / financial advisor is consulted to review and upgrade the existing trust deed. If the trustee is a corporation then appropriate resolutions must be passed, and minutes recorded.
Binding Death Benefit Nominations (BDBN)
A BDBN is a direction to the trustee of a superannuation fund to pay death benefits to an eligible beneficiary or beneficiaries, or to your estate.
The superannuation trust deed should include provisions allowing members to make BDBNs which may be tailored to account for various contingencies, such as the inclusion of cascading provisions to provide for alternate beneficiaries if one or more die before the fund member. A BDBN can also identify certain assets to be left to particular beneficiaries and, if permitted, nominate how benefits are to be paid such as by lump sum or pension.
Limited recourse borrowing
An SMSF may borrow funds to purchase certain acquirable assets provided the borrowing arrangements satisfy strict requirements and the asset passes the ‘sole purpose test’. The superannuation trust deed must contain provisions to facilitate these arrangements.
An acquirable asset includes real estate for investment purposes. The sole purpose test generally means that the asset must support the investment strategy of building wealth for retirement.
The asset is held on trust and the lender’s rights against the SMSF trustee for default under the loan are limited. This means that other assets held by the fund may not be used as security. Lenders may however require personal guarantees from individual members.
Investment in real estate through an SMSF can deliver many benefits such as having control of the investment, structuring rental income to take advantage of reduced income tax, and reduced capital gains tax rates if the property is sold or transferred.
Notwithstanding the benefits, these arrangements are complex and certain pitfalls may arise through common mistakes. Compliance and procedural errors can result in additional taxes, duties and substantial penalties.
Most lenders require that the trustee is a corporate entity and a bare trust must be established to hold the property on behalf of the fund. It is essential that the correct entity is named on the purchase contract.
Trusts are complex arrangements and must be carefully managed and administered to ensure compliance and to prevent unintended taxation consequences.
The potential benefits of having a SMSF can be achieved through sound planning and advice, and a well-drafted superannuation trust deed.